The following MBW op/ed comes from Jack MacDonald, Managing Director of Alvarium Investments’s Media Finance operation. MacDonald (pictured) recently launched a UK-based fund for music rightsholders offering loans of USD $2 million and above, calculated against intellectual property assets and/or future income streams.
After decades of undervaluing the music industry, the highly predictable and trackable income from streaming is causing investors to turn their heads and give the sector the attention and capital it deserves.
In recent times we have seen a surge in rights acquisitions, mainly focused on music publishing catalogues, which has shone a light on that age old question – what is the value of music?
Given the multiples being offered and the sums being spent it’s clear that the value is significant, and we should be thankful that music rights are being recognised as the valuable asset they so clearly are.
Several high profile companies have trailblazed a path to enable this value to be realised and have laid the foundations for a robust commercial environment in which rights owners can negotiate from a position of strength
This can only be a good thing.
But this acquisition model is not the only option available and selling rights does not have to be a default position for artists, songwriters, producers, labels and music publishers.
It goes without saying as well that selling rights also means a complete loss of control with any of the benefits derived from future income growth lost forever. Something many artists have had cause to regret once their catalogues are owned by someone else.
It is now, however, possible to use rights as a way of raising funds but also to retain them while preparing to ride the anticipated upside that is being predicted as music consumption increases, consumer subscription tariffs rise and more platforms come online.
As a financier I have been at the heart of getting big banks interested and capable of lending against Intellectual property for over ten years , launching the relevant lending platforms at both RBC and Credit Suisse.
Historically and indeed currently banks will only offer loans against music catalogues to only the top 1% of the sector. These loans usually have to be above $5m and will be ‘short dated’ at less than 5 years. And these loans come with the heavy strangulation of personal guarantees, will be cross -collaterized with other assets and there will be other demands and restrictions.
Interestingly, because of the growing global institutional interest in and understanding of the sector, we are now at a crossroads where the term of the loan can be stretched out, the margin can come down to attractive levels and the assets are considered so strong in their own right that personal guarantees no longer need to be a factor.
In short, loans which were previously seen as a worrisome burden by some, are now becoming much more attractive, and increasingly low risk for both lender and borrower.
The enormous impact that the COVID-19 pandemic has had on the music industry with, for example, the live sector particularly being decimated over the last year, has caused a plethora of artists, songwriters, producers, music publishers and labels to consider selling their catalogues to compensate for the loss of revenue. Sometimes just to keep their heads above water.
These circumstances do not lead to negotiation from a position of strength. With the aforementioned growth in streaming and the new MMA legislation, annual royalty revenues are projected to soar. It is important therefore that there is an opportunity for those who created the value to continue owning and profiting from that value throughout their lives.
And to do so without unnecessary and in some cases unwelcome fanfare. Acquisitions often lead to high profile media coverage as buyers leverage the resultant publicity to market their own offerings.
By taking a loan the rights holder always reserves the right to discretion.
“It is important that there is an opportunity for those who created the value to continue owning and profiting from that value throughout their lives.”
There is no reason therefore, given the current investor confidence in music rights, that an equitably structured loan option couldn’t provide a much better alternative to selling those rights.
Alongside some well-respected and highly experienced music industry advisors (such as the UK’s former Association of Independent Music CEO and Chair, Alison Wenham, and ie:music Co-Founder and CEO, Tim Clark), we have launched Music Credit Fund to offer rights owners the opportunity to monetise their music catalogues and royalty streams without selling.
Any loan will ensure that the rights owner is able to maximise their cashflows over the medium term whilst retaining their ownership and current levels of control. This loan-based option secured against rights and royalty income allows the release of equity with no personal guarantees or restrictions on how the income is spent.
I think it is hugely important to put the creator front and centre of any discussion about what music is worth and how it is valued. The outright sale of rights may very well work for some, but it doesn’t sit well with others.
It is also worth companies with established catalogues considering some of the ways they could utilise such a loan to attract new artists, buy out catalogues, restructure their business and release equity for the owner.
The last couple of years have shown that there is clear appetite from investors to engage with the music industry and hitherto the focus has been focused on acquisition.
But now there is another conversation to be had – one that will never lead to seller’s remorse.Music Business Worldwide